1. Assignment
Use the concept of the Phillips curve to examine the relationship between the price level and the unemployment level in both the short run and long run.
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2. OPEN ECONOMY MACROECONOMICS- BALANCE OF PAYMENTS
K. Adjei-Mantey
Department of Economics

3. Balance of payment
BoP is a record of a country’s transactions with the rest of the world
Goods
Services
assets
It summarizes an economy’s transactions with the rest of the world over a period.
Shows how foreign exchange is earned and used in an economy

4. BOP also records….
Financial claims on the rest of the world
Liabilities
Transfers

5. BoP accounts usually divided into two main parts
The current account
The capital account
The current account records transactions for goods and services, interest, transfers
The capital account records transactions in assets
Note: BoP focus is on transactions rather than actual payments

6. The current account
The current account records transactions for goods and services, interest, transfers
Current account divided into two
Visible account
Invisibles account

7. Visible Account Records transactions of tangibles Cocoa Gold Oil
Pineapples
Wax prints etc

8. Invisibles account Have three sub parts
Transactions in the import and export of services eg. banking, insurance, consultancies, tourism etc
Payments of investment income: interest, profits, dividends on the use of capital owned by nationals other than those of the country of the use of the capital
Transfers
Remittances etc

9. Balance of trade and balance on current account
The balance of trade is the difference between exports of goods and services and imports of goods and services.
Balance of trade is the largest component of a country's balance of payments.
The balance on current account consists of net exports of goods, plus net exports of services, plus net investment income, plus net transfer payments.
It shows the difference between how much a nation has spent and how much it has earned.

10. The Capital account
Transactions related to the movement of financial assets.
Shares
Bonds
Bank loans etc.
Note: Physical capital such as machinery, equipment etc. are not recorded here
Capital outflow
Ghanaian purchases of foreign investments
Uses foreign exchange
Capital inflow
Purchases of Ghanaian investments
Earns foreign exchange

11. Balance of Payment (BoP) Account
An Example of Balance of Payments Account
CURRENT ACCOUNT
Goods exports
682.6
Goods imports
– 1,166.9
(1) Net export of goods
– 484.3
Export of services
289.3
Import of services
– 240.5
(2) Net export of services
48.8
Income received on investments
244.6
Income payments on investments
– 256.5
(3) Net investment income
– 11.9
(4) Net transfer payments
– 56.0
(5) Balance on current account ( )
– 503.4
CAPITAL ACCOUNT
(6) Change in private Ghanaian assets abroad (increase is –)
– 152.9
(7) Change in foreign private assets in Ghana
533.7
(8) Change in Ghana government assets abroad (increase is –)
– 3.3
(9) Change in foreign government assets in Ghana
46.6
(10) Balance on capital account ( )
474.1
(11) Statistical discrepancy
29.3
(12) Balance of payments ( )

12. Transactions are either debit or credit transactions
All transactions that bring receipts from foreigners are credit transactions
Merchandise exports
Transportation and travel receipts
Income received from investments abroad
Gifts received from foreign residents
Aid received from foreign governments

13. Transactions that involve payments to foreigners are debit transactions
Merchandise imports
Transportation and travel expenditures
Income paid on investments of foreigners
Gifts to foreign residents
Aid given by home government
Overseas investments by home country residents

14. Every credit transaction has a balancing debit transaction, and vice versa, so the overall balance of payments is always in balance.
The international reserves
A statistical discrepancy is computed where the bop is not in balance to make up for any shortfalls

15. Discrepancies proceed from:
Under-reporting investment incomes
Under-reporting merchandise imports
Under-reporting capital exports
People hide these transactions from governments for the purposes of tax avoidance or some other reason.

16. Favorable balance or improved welfare?
Balance of trade important if state power is paramount
Otherwise, volume of trade in the presence of comparative advantage is if citizen welfare is paramount.

17. Visit the BOG website: www. bog. gov
Visit the BOG website: and see what Ghana’s balance of payment accounts have looked like in the recent past

18. THE FOREIGN EXCHANGE MARKET
K. Adjei-Mantey
Department of Economics

19. Exchange rates and macroeconomic Policy
Exchange rate is the amount of one country’s currency that is traded for one unit of another country’s currency
It is the price of a currency in terms of another currency
The price of the Ghana cedi in dollar terms is an example of the cedi – USD exchange rate
Exchange rate largely determined by forces of demand and supply of the currency

20. Demand for the USD
Ghanaians demand the USD to buy goods and services from USA or US based firms
To buy US assets
These goods, services and assets sold in USD and hence local residents will demand USD to be able to purchase them
The demand curve for USD has the usual downward sloping nature
The lower the exchange rate, the greater the quantity of dollars demanded

21. The lower the price of the dollar, the cheaper American goods and services are to Ghanaians.
Hence more American goods are demanded
Quantity demanded of USD increases

22. Shifts in the demand for dollar curve
Ghana’s real income
Increase in real GDP increases demand for USD at same ER
Relative interest rates
A lower interest rate in Ghana will increase demand for USD (to purchase more attractive US assets)
Relative prices
Increase in Ghana prices relative to US increases demand for USD
Expectations of future exchange rates
Expected rates in the future determine demand for USD today
Tastes and preferences

23. Supply of USD
Supplied by economic agents in America to buy Ghanaian goods and services
To buy Ghanaian assets
Supply of the USD is positively sloped
The higher the ER, the more cedis an American gets for supplying USD 1.
The American is able to buy more goods from Ghana
Thus needs more cedis

24. The higher the price of the dollar,
the cheaper Ghanaian goods are
Americans buy more
Need more cedis
Supply more dollars
Though in principle, this need not be because the American can get the more cedis by supplying the same or less USD, it has a rare occurence in practice
Hence economists stick to the upward sloping supply curve.

25. Shifts in supply of USD Real income of the USA Relative interest rates
Relative prices
Tastes and preferences
Expectations of future ER

26. Equilibrium
The intersection of the demand and supply of the USD gives the exchange rate for the USD
This is the price of the dollar.

27. Appreciation: increase in the price of the currency
Depreciation: a decrease in the price of the currency.
an increase in the (nominal) exchange rate means a depreciation of the domestic currency
When more cedis is needed to buy the same amount of dollars
A reduction in the (nominal) exchange rate means an appreciation of the domestic currency
when less cedic is needed to buy the same amount of dollars
An appreciation of one currency means a depreciation of the other currency

28. Exchange Rate Regimes
Earlier discussion is a system known as floating (flexible) exchange rate regime
where demand and supply determine the exchange rate
The other regime is known as fixed exchange rate regime
where the central bank or government determines (or fixes) the exchange rate
In between these two, there is the managed float exchange rate
Where the floating ER regime is practiced but there are occasional interventions by the central bank or government as and when necessary to keep the ER within a particular range